The Problem Of Paying For Healthcare

By Gerrit Van Wyk.

Health insurance is a bust.

People started insuring themselves against the risk of a loss thousands of years before the Christian Era. Basically, some of us club together and provide funds that will compensate another if that person suffers an unfortunate loss, in that way spreading the risk of a catastrophic loss. Mathematicians later developed formulas for measuring and quantifying the risk of a loss.

When Bismarck introduced social security in Germany in the late 1800’s, he declared age 70 as the retirement age, because he knew few German workers lived beyond that, which Germany lowered to 65 in 1916. In 1935, 65 was set by the US Social Security Act as well. Both was a thumb suck with no science behind it. At the time, life expectancy in the US was 58 for men, but 77 if you made it to 65, today it is 75 and 82 respectively. In other words, for life insurance companies, payouts went up during the past 85 years or so because people live longer.

You can calculate premiums if you know what the chance is of misfortune, the replacement cost if that happens, and the number of people prepared to cover the loss. Premiums are invested and become lucrative if the insured loss does not happen, or if the contributions exceed the loss. The more people contributing, the lower the premium, which makes it attractive for more people to contribute, in other words, creates a positive feedback loop. In practice, insurance premiums are a financial loss for subscribers unless you suffer a loss equivalent to your contribution. If you don’t suffer a loss, you lose, if you do, you win, which means you take on a small loss for the security of the unlikely event of a big loss.

Insurance companies thrive by appealing to our fear of a big loss. They make their money by accumulating large cash stashes, and reducing their exposure to risk. Hence the many pages of small prints in our insurance contracts. We promise to pay you, if…

To counter a loss of income during the Great Depression, Baylor University Hospital started the first of what could be called a hospital plan, which was soon adopted by other US hospitals and became Blue Cross in 1946. The problem these plans faced was unlike other hazards, illness is a spectrum and therefore cannot be measured, which they overcame by insuring against hospitalization, which is an event and measurable.

The forerunner of managed health care, prepaid practice, soon followed, for which Dr Sidney Garfield, founder of the Kaiser Foundation Health Plan, was charged with unprofessional conduct by his colleagues and lost his license to practice. Many other physicians faced the wrath of their colleagues the same way. Being denied access to hospitals forced Garfield and others to build their own hospitals, such as Kaiser Permanente and Group Health Cooperative of Puget Sound. After that health insurance rapidly grew.

Unlike other insurance, health care insurance contains two poison pills. Research shows about 1 in 4 people in a population will access health care per month, and about 1 in 20 will end up with specialized hospital-based care. The risk of a ship sinking or house being burned down is much less than between 5 and 25% risk of an illness event. The bigger problem is health care is demand driven; people want to see physicians for even minor ailments and demand the fancy and very expensive technologies glowingly reported in the press, irrespective of its merits, which drives up costs. In economic terms, demand is inelastic, in other words, price has no effect on cost, and, since insurance is prepaid, psychologically it feels as if it is free. To which insurers responded with co-payments on top of your insurance premium to contain demand.

Things puttered merrily along while the post WW2 baby boom supplied numerous young healthy workers making contributions, but sped towards a very visible brick wall as health care made them live longer, hence more retirees with more chronic conditions and fewer workers available from the declining birthrate they left behind to fund the pyramid scheme. Health care insurance had to respond.

First, they attempt to reduce risk by insuring only younger healthier people at the expense of older and sicker ones, leaving them to fend for themselves. Secondly, during the 1970’s they became directly involved in managing care to control costs. That made many very lucrative and shifted risk to the government.

In some countries such as Canada and the UK, government became the health care insurer, which was a political winner. Everyone earning a buck contributes to the risk pool through taxes. That doesn’t make the poison pills disappear; fewer working boomers and not enough young workers to replace them leaves fewer taxpayers, which means increasing taxes. Secondly, governments, specifically in Canada, also controls services and therefore costs, but that doesn’t make the technology-driven demand go away, which leaves tough political decisions to be made, and politicians don’t deal in those kinds of drugs.

In a privately insured system, clients can vote with their feet when premiums become too high, but public systems voters don’t have that option, you are locked in for life. Typically, in the former, young healthy people less likely to need health care quit, which means fewer left to contribute, but at the risk of financial ruin if things go wrong. Health care bills is the leading cause of bankruptcy in the US.

In a public system the emphasis shifts towards how well services are stewarded and in Canada receives an F. Not surprisingly, it looks South of the border to the lucrative privately insured system for answers, one of which is Neo-liberal economic dogma. Few taxpayers in Canada realize they already pay 60% out of pocket towards their health care in addition to their tax contribution. Yes, acute care is free and no-one will be bankrupted if you get seriously sick, but at the same time those unable to pay for the 60% go without ambulance services, physiotherapy, dental care, home care, prescriptions, and much more.

That is, if the system functions optimally. In their haste to turn Canadian health care into a US-style efficient cost-effective system based on Neo-liberal dogma, our politicians and leaders stripped the system to the point of severe malnutrition. What we should have done, was not to look at health care as an insurance problem, but how to utilize financial and other resources efficiently.

Every family in Canada knows you can’t spend more than you earn, which requires tough choices. We have been looking at our government to raid the piggy bank for more pocket money to fund our wants. That piggy bank is now empty and, like families, we must begin to look at not what we want from health care, but what we need and can afford. Government must admit the piggy bank is empty and quit playing a shell game with its finances, and above all, must start a conversation about how to dig ourselves out of this mess. We are not the same as privately insured health care who has big plans for making more money at all cost, we must come up with our own solutions, and there is no reason we can’t, other than a lack of willpower.